Can’t Touch This! – A Merit-based Reservation Strategy to Social Equity

Can’t Touch This! – A Merit-based Reservation Strategy to Social Equity




Ganga Prasad G. Rao
gprasadrao@hotmail.com
gprasadrao.blogspot.com





Look around and it might seem as though the gulf between the Developing world and the Developed world is closing. But look closer and beyond the industrialization and consumerism, often the benchmark for such comparisons, and what do you find? Many, if not most third world societies, are steeped in economic and social inequity that has, due the spread of western capitalism, turned oppressive on the poor and/or historically socially suppressed. To compound it, this oppressed class, a large electoral block, has been the darling of many a political party who have sought, whether from the heart or with an axe to grind, to espouse their cause on way to the corridors of power. Predictably, the politicians thus elected enforced equity by adopting the brute force, heavy-handed means of reversing the wrong – a Quota-based reservation/entitlement system in higher education and jobs. To make matters worse, they chose to limit the quota exclusively to those socially disadvantaged irrespective of income - despite the fact it is a primary, fundamental determinant of educational achievement in a capitalist society - thus excluding the worthy poor belonging to the socially forward classes. The ill-effects of quota have been extensively documented. They deny the deserving, even reverse the incentive to excel in the society, and in the present context, only serve to induce the flight of the intelligentia to a fairer, more just society, often a developed nation, thus robbing the nation of its brighter, and potentially the more influential of its citizens. Between the ‘rather today than the day after’ incentives in politics, and the crocodile tears of the legislators, the quota-based reservation system is turning our society toward mediocrity – a mediocrity magnified by the economic inefficiencies and the irreversible, unjust social paradoxes that it engenders. The big question facing you and me, the thinkers, is whether there is a way out of this double-edged dilemma, how, and when?

Now, I could buttress my proposal with economic rationale, establish the motivation for intervention, then posit a social objective function, and optimize it taking cognizance of the various constraints – political, financial and social, to obtain ‘optimized rules’ that spell out the ‘hows’ of achieving the objective. Instead, I lay out here a modest proposal, if descriptive and tentative. The proposal sets forth a financially-closed, merit-based system of ensuring social equity in educational attainment that fosters justice for students from poor and the suppressed sections of the society while retaining the incentives to excel, and the freedom of choice across the various stakeholders. Consider an academic structure in which universities follow a graduated, strictly merit-based system of admissions to choose between and manage applications for admissions. In this system, applicants are either invited with lumpsum awards on enrolment, accepted without an admission fee, or required to pay a lumpsum (capitation) fee toward admission (as different from annual tuition fees, for which banks provide collateralized educational loans). Anticipating this monetary (dis-) incentive-based admission system, the Government and the Industry - both with equal stakes, if in the long run - contribute toward a pot for both economically and socially disadvantaged students. The Government finances annual, cohort-specific Equal Opportunity pots by issuing an annual series of EO Bonds in the financial markets. The Manager of the EO pot first matches infrastructural investments by the Industry in the education sector, and issues EO units to the target group of students from the residual in the pot. The industry invests in a ‘risk-based’ ZS between, on one hand, sovereign EO bonds of various past cohorts, and on the other, incremental educational infrastructure that anticipate a matching grant from the Government. This apportionment is guided by long-run macro and career/wage trends. In Boom time, when the Government is loath to issue new EO Bonds due the rise in bond yields, the Industry cashes out of equities, and moves partly in to the EO pot for the fixed returns the EO Pot Manager offers. It invests the rest in bargain-priced EO bonds of previous years. In recessions, as Bond prices rise and the Government issues a fresh series of EO Bonds, the Industry moves from EO Bonds in to, on one hand, Educational Infrastructure (with a match from the Government), and on the other, a ‘perpendicular’ set of equities. This financing scheme serves the Government’s cause of supporting equity in education and career. It also constitutes a balanced approach for the Industry to assess future educational demand, if necessary stoke it, and provide for anticipated educational infrastructure.

The decision regarding the magnitude of EO bonds to be issued is determined, if implicitly, with marginal economics. Put succinctly, the Government issues EO bonds until, and at the margin, it perceives the marginal cost of funds raised (the coupon rate on the Bonds) just equal the falling social marginal returns from supporting the disadvantaged. (The Government could also examine the implication of limiting its bond issue to the value of collaterals that underlie the student loan portfolio which it purchases in bulk from banks). Too less an issue of EO bonds and the Industry falls behind in adding to educational infrastructure as does the society in correcting educational and, consequently, career inequity. An excess issue of EO bonds induces a crowding out of investment from other productive sectors of the economy, and affords many in the target group the luxury to drop out before college with potentially a substantial, undeserved hand-out that reduces the cause of education and social upliftment.

The EO Bonds issued by the Government are bought by investors, in particular the Banks and the Industry. The Industry exploits these bonds as a risk-counterweight to infrastructural investments it makes in the education sector. The variations in coupon rates, prices and maturity dates of the various EO bond series, as well as the differences in both the amount of, and interest rates charged on loan portfolios across years, create arbitrage and hedging opportunities necessitated by the dynamics of the financial markets. The ‘cohort/’vintage’-specific’ EO bonds are traded between the Industry and the Banks who both use them as a counter-instrument to engage in interest rate arbitrage trading against the Government which holds and trades, as part of its periodic monetary balancing, various vintages of discounted collateralised student loan portfolios that it leverages to underwrite the EO bonds. These trades reveal the various marginals that inform on the direction of investment, opportunities and anticipated risks in the education sector and the career market. The Government has the option to retire the EO bonds prematurely once their face value is recovered in these arbitrage trades and hedging operations.

Having outlined the financial sub-module of the proposal, we now move to the apportionment of the EO pot. At its core, the proposal involves a one-time crediting of ‘EO units’ to the targeted group from the net assets of the cohort-specific EO pot. The EO units gain in NAV through the school years, and vest with the student upon successful completion of schooling; their value at vesting time is determined by the then prevailing NAV of the cohort-specific EO pot units. To avoid the issue of defining poverty cut-offs arbitrarily, the Government chooses to issue units on an income-based sliding scale that is common across the targeted social classes. Under the sliding scale allotment, students constituting the lower income percentiles of the target group are favoured with more units than students belonging to the higher income percentiles (whose family income equal those of the upper middle class of the society). The matter turns murky when accommodating a hierarchy across the socially suppressed classes (OBC, BC, SC, ST) who do not necessarily conform to correlatory prejudices concerning social status and incomes. One feasible way out of this quicksand involves preferentially favouring the relatively impenured within each suppressed class. Thus, while the largest majority of the poor and socially disadvantaged students gain even otherwise, those extra-ordinarily rich within their social class must achieve a higher ‘within group’ end-of-school performance percentile. Larger the difference between actual and ‘staked’ income, higher the ‘within group’ performance benchmark they must achieve to be endowed in full with the monetized EO units. This relationship, as graphed below, would vary across social classes and over time, thus permitting the policymaker (as opposed to the representatives elected by the majority) fine control over social outcomes. Those socially disadvantaged but rich, who might stake a low income along the sliding scale to obtain more EO units, must achieve a correspondingly high ‘within group performance percentile’, or pay the price with a lesser vesting proportion of their cumulative EO units as appropriate to their academic underperformance. In other words, a rich but socially disadvantaged student, who stakes a low income for the units it affords, must achieve in the higher percentiles of the distribution of scores for his group, else cede EO units in some relation to his ‘within-group’ under-performance. This policy avoids the income stereotyping of suppressed social classes, yet incentivizes academic excellence among the ‘would be’ (wealthy) leaders of the suppressed groups. It also checks any incentive to walk away ‘rich’ with a mere school education.

Students seek admission to various universities and specializations and obtain offers with either a lumpsum enrolment incentive, free admission, or a fee depending on their academic merit relative to the competition for the University and the particular field of study. Crucially, the decision concerning admission is entirely merit-based and non-cognizant of income or social considerations; those academically worthy being welcomed with lumpsum scholarship grants and those less competitive with either a freeship, or, as when a highly sought specialization is sought at a top university, even a lumpsum admission fee. Students evaluate the ‘University-Field of study-Financial (Dis-)Incentive’ offers on hand and choose one consistent with the highest expected future pay-off given their accumulated, vested EO balance at the current NAV. Clearly, their choice could involve exhausting the entire vested EO balance on the highest offer, an academic compromise that enables them to encash a part of their vested balance if by choosing a less popular university and/or field of study, or even dropping out with the entire vested/partly vested balance if the perceived benefits of university education are deemed less attractive compared to the alternatives available to them beyond the academe (Paradoxically, the alternative to drop out after school with the vested, monetized EO unit balance provides a ‘reality check’ on the costs and rewards of education).

The proposal outlined above is simultaneously efficient and equitable. It brings about equity in educational opportunities within and across groups. It provides the largest degree of freedom to the various stakeholders. The inclusion of the financial markets, in particular the closed nature of financing, ensures that the policy is robust and self-contained, and will not spill over to the rest of the financial market. The cross-trades of the EO bonds from various cohorts against the tuition loan portfolios reveal a richer dynamics of the education sector. Further, the use of collateralised tuition loans to back the issue of fresh EO bonds ensures a transfer of ‘information’ from the future ‘downstream’ world of higher education and career ‘upstream’ to the future generation while they are yet students in school. Such advance information permits anticipatory actions, reactions and alleviating strategies that smoothen and align ‘demand’ and ‘supply’ closer to the equilibrium. By avoiding irreversible, inter-generation effects on the student side, and anticipatory shortages in, or pre-empting wasteful large, fixed investments in educational infrastructure, the proposed policy minimizes the inter-temporal costs of achieving an efficient and equitable society with a professionally qualified and educated populace. Just as important, the proposal offers a closed financial solution that provides resources to the needy and suppressed, and financial returns to those who take risks and invest in social causes. It preserves the sanctity of academic and professional world while ensuring that social justice for the poor and suppressed classes is naturally achieved in the pursuit of stakeholder self-interest.

Have the cake………………………..and eat it too!

The GP 'Macro Bowl O' Economy !

The GP ‘Macro Bowl O’ Economy !

Ganga Prasad G. Rao

gprasadrao@hotmail.com

The world over, it is the same humdrum, the same reaction to the economic crisis that has afflicted nations across the globe. Every economic contraction, no matter of what origin must be responded to by stimulating the economy with low interest rates and ‘stimulus funds’. Pump prime an economy with ‘policies’ that have no credibility, shore up the very banks that caused the financial crash with their ultra-short trading, even indulge in a privately enriching market crash despite an obvious conflict of interest …..and when the economy fails, put your hands up, point your finger at the ‘other guy’, and walk away with your booty in the melee of a regime change. Macro-politics, my friend, is an art to master! So, in a world of no alternatives, let’s, for a change, break all taboos – I mean, academic - and imagine the unimaginable. Let us motivate a macro-economy with an entirely different rationale. An economy that does not hide its loot behind austerity programs, an economy that does not encash policies and regulations even before they are enacted, in fact an economy that cares, I mean a ….. ‘welfare state’, yes you heard it right, a ‘freebie economy’. A freebie welfare state when we aren’t able to even half-way support a subsidy economy? Sure sounds implausible. But ‘miracle’ is a word in the dictionary, right? So, let’s dare the odds and dream…I mean, read on!

Consider a society comprised of a set of households maximizing whose aggregate utility is the objective of the Government. Let HC represent a vector comprising of the entire set of households, and let i denominate the income-ranked ‘percentile elements’ within. HCi|i=k represents households in percentile i with income equal an arbitrary percentile, k. P denotes population, T represents the state of Technology, and Pc, the price of carbon, is a proxy for the (scarcity value of) the environmental commons. As the frontier of technology expands and the resource base expands, productivity increases in the economy, resulting in higher income, savings, wealth and investment (and a lowering of discount rates) among households. Due the existing inequity in household income, the expansion of the economy benefits the higher ranked household, HCi|i>>50 more than it does households HCj|j<<50. Such economic growth may be expressed as (GDP^f| Y^HCi|i>>50 > Y^HCj|j<<50), where GDP^f represent GDP-Efficiency phase, and Y^ represents the change in household income. In other words, income/wealth growth in the higher percentiles of households far outpaces income growth in the lower percentiles. Conversely, GDP growth could be ‘equitable’ (denoted by GDP^e) and reduce the disparity in income, ie, (GDP^e| Y^_HCi>>50 << Y^_HCi<<50). These two phases are not unlike an elastic rubber band that expands proportionately from a point of origin (a peg/stake) in the poorest household (GDP^f), and one that rebounds in favour of the poor (GDP^e) with the income of richest held constant. In times of recessions, similar logic holds. In a shrinking economy too, two phases are possible – an inequitable recession with the poor suffering larger losses than the rich, and an ‘equitable’ recession with the rich paying the price. In the latter case, the band, pegged to the poor, shrinks from the rich end, and in the former, the poor end of the band slides back while the ‘hedged’ rich hold their place at the far corner. Over time and across the expansionary and contractionary phases, the rubber band economy moves forward in fits and starts, much like a worm, occasionally backtracking some, perhaps to ‘straighten’ its path. If that were all to this 2-phase rubber-band economic paradigm, one would label it a ‘worm hole economy’ and move on to the next jingle on the idiot box.

But, what if we embellished this economy not with a ‘subsidy’, but a ‘freebidy’ that offered free a subset of consumption goods and services to a subset of households up to a certain monetary amount per period? The freebie consumption subset would comprise of both essential goods and upscale ‘luxury’ and high-tech goods. Eligibility would be determined by a cut-off household percentile, HCi|i = z, z being the percentile cut-off determined by a host of economic, demographic and environmental variables. Predictably, the percentile cut-off would rise with income and resource base, RB – a variable that half-proxies for technology as well. Anticipating the impact of the freebidy scheme on prices and labor supply, as well as a ‘freebie-exploiting society’, and to accommodate the environment, the percentile cut-offs is designed to roll back with wage rate, w, the inflation rate, r, the price of carbon permits, Pc, and with PLsw, the marginal bid for the issue of landfill permits to private landfill operators in an auction (a proxy for solid waste fee), and Pop, the Population:

Freebidy Percentile Cut-off, z = g(PCGDP^, RB^, w^, r, Pc^, PLsw^, Pop^),

where ‘^’ represents percent changes.

The cut-off plays an important role in separating the haves from have-nots. The latter group are supported economically with freebies - essentials are doled out up from the bottom percentiles of the household ladder, and luxuries handed free from the cut-off downwards. As income and the resource base expands from technology, knowledge enhancements, and reductions in cost of production, the standard of living and lifestyle expectations undergo revision, and more goods and services fall either in to the essential or ‘commodity’ category. Concomitantly, the percentile cut-off increases, consequent to which the ‘freebie subset’ enlarges. In recession, the logic reverses, and the cut-off percentiles fall, or equivalently, less of the freebie is available to eligible households. The intention, indeed the hope of this radical proposal, is that by offering essential or luxury goods and services free to the deserving and future consumers, the government could keep the economic juggernaut moving across recessions and depressions without resorting to patently self-deceiving macro-gimmicks. Thus distributed, economic growth is equity- enhancing; simultaneously, it enhances/preserves scale economies and permits a rationale for price discrimination while stimulating demand for luxuries and high tech products in those who likely to move out of the freebie net and turn future customers.

It doesn’t take an economist to question the financial sustainability of the proposal, or an environmentalist to question its environmental sustainability. That a ‘freebidy’ in isolation is unsustainable unless there is near limitless resource or near zero-cost, environmentally benign, production technology is well known. But this proposal does not assume either; it is designed within the confines of ‘closed finance’ so that the freebidy economy automatically limits itself to what is sustainable. In essence, the proposal is initiated, dependent and bounded by ‘macro, strategic/hedge money pots’ that nonetheless serve to allocate and bound expenditures and investments in the real world. These money pots are in the nature of funds tied to ‘economic drivers’ - Inflation, Potential GDP (Gap), Solid waste (remediation), and Product quality – that impact on the nation’s health, and which are anticipated, staked and hedged by the industry and the government. To this, one could potentially add random and non-random, natural and anthropogenic ‘phenomena’ such as wars and communal strife, or earthquakes and monsoons, which too are anticipated and hedged at the start of a new term.

Toward such a closed, sustainable financial allocation, let us first recognize the stakes and claims of the Government and the Industry. Following a win at the hustings with its plank, the Government, cognizant of its obligations to serve its citizens, aligns its monetary policies along a targeted Potential GDP which implies a certain M2 Growth and anticipated inflation rate. In a complementary move, the Industry counts on a certain amount of environmental obligation (the price (of carbon) of polluting the commons, Pc), and some permitted environmental damage (Solid Waste, implicitly translating to a prospective pot of money, SW 2key). The Industry joins the Government in accepting a ‘Service’ obligation which they split in to boom-cycle and bust-cycle 2keys. The Government, aware that the potential GDP will likely not be achieved or adhered to, and that its trend will be interrupted with booms and busts, stakes a boom-time ‘Inflation 2key Potential GDP 2key’ ‘self-interest’ card, while the Industry pursues a ‘Product Quality (PQ) Bakey Solid Waste 2key Share’ strategy. The two sides exchange their respective bakeys, ie, the Government offers to the Industry an Inflation 2key Bakey, while the Industry does not mind the Government sharing in its SW 2key Bakey. In Bust, the Industry falls back to ‘Product quality 2key SW 2key Bakey’ and the Government to its Inflation Bakey Potential GDP Gap 2key. The Government seeks the PQ 2key bakey from the Industry in return for the Potential GDP Gap 2key Bakey. These funds are then applied by the two sides toward their freebidy obligations/offers as explained below.

In the context of the reality of macro-cycle involving growth periods and recessionary phases, due which prices, inventories, and interest rates cycle up and down, it’d be appropriate, even opportune, to bifurcate the ‘freebidy’ set of goods two ways: in to Essentials and Luxury, and in to Durables and Consumables. Such categorization is consistent equity goals of the government, with the impact of the interest rate cycle on the demand for durables, the impact of interest rates on durable inventories, and of those inventories upon prices. The categorization also helps focus funds specifically to targeted families for targeted outcomes.

		BOOM				BUST
		ESSENTIAL		LUXURY		ESSENTIAL		LUXURY
		Durable	Consumable	Durable	Consumable	Durable	Consumable	Durable	Consumable
BOOM	SW 2key Bakey		Ind	Ind
	SW Bakey Share	Govt			Ind
	Inflation 2key		Govt
	Inflation Bakey				Ind
BUST	Pot GDP Gap 2key						Govt
	Pot GDP Gap Bakey							Ind
	PQ 2key								Ind
	PQ Bakey					Govt

In Boom, the Government chooses to discharge the service obligation; it applies the Service 2key to serve the indigent households down from the percentile cut-off, while the Industry is too busy minting money to care about the bakey. In this phase of the economic cycle, the Government and the Industry share their ill-gotten Inflation and SW 2key bakey with the indigent. The Government, inherently more caring for the poor than the Industry, sponsors the free issue of essential-consumables to Household below the cut-off in a bottom-up fashion until the Inflation 2key pot runs out. The Industry, always seeking to expand its business and profit from it, offers ‘luxury consumables’ as freebies to those near the ‘income-knee’ (the percentile cut-off). Between the Government and the Industry, the Inflation pot and the SW 2key bakey pot obtain some equity gains to the indigent and prospective lifestyle gains to those at the threshold of crossing the ‘poor-rich threshold’.

In Bust, the Industry takes over the obligation, and sponsors voluntary organization with the Service 2key to serve the poorest in society. The Government is too busy with its economic policy-making seeking an end of the recession, to worry about the bakey. Beyond their service obligation, the Government and the Industry switch to two other pots: the Potential GDP Gap and the Product Quality. The industry shares its PQ 2key as durable-consumable freebies with prospective consumers just below the percentile cut-off. In addition, it supports those IPOs that support the cause of product quality, energy efficiency and resource/material conservation. The Government chooses to ‘invest’ the PQ Bakey in essential durables among the poor households at the bottom of the percentile ladder. It also offers its PGDP Gap 2key to freebidize essential consumables. In all cases, the allocations by the Government/Industry between essentials and luxuries and between consumables and durables follow the proportions in which the 2key and bakey were taken by the two opposing parties.

The function ‘g’, which determines z, the critical freebidy percentile cut-off variable, and which weights the various socio-economic and demographic variables, is further calibrated in an accounting sense with the size of the various money pots involved. As technology advances, more resources are discovered, and as production turns more efficient – both cost-wise and environmentally, both Potential GDP and Product Quality money pots expand, the percentile cut-offs advance higher in to the household income distribution, and the society turns incrementally a welfare state. Conversely, if inflation rears its head, if population expands unsustainably, if there is palpable resource scarcity, or if the environment deteriorates due inefficiency in production, the percentile cut-off shrinks back, reducing the size of the freebidy pie to what is sustainable given the money pots on line.

To ensure efficiency in the allocation of freebies, the administrator of this system issues ‘Durable-‘ and ‘Consumable-Freebie points’ to the target group that, in aggregate, sum up to the available funds. These points are bankable across time, but are neither exchangeable across type of good or across recipients. The recipients of the freebie points exchange them for the various durables and consumables offered in the freebie basket, each priced in points equal the prevailing market price. This strategy, tantamount to gifting extra, albeit conditional income, preserves consumer choice, maximizes aggregate utility gain among the indigent and minimizes the efficiency and investment distortions so characteristic of subsidies. Thus designed, the freebidy proposal is efficient, closed, sustainable, and self-perpetuating.

Despite the break from traditional economic wisdom, and the overtly unsustainable incentives that it induces, the freebie economy has its advantages. First, it provides essentials for the really poor. Since a PDS is in place, it’d be straightforward to replace subsidized goods with rationed freebies. The strategy, though, is more advantageous with income-elastic luxury goods than essentials, since it permits ‘judicious’ price discrimination in the cover of cross-subsidizing of the poor by the rich, and simultaneously serves to pull the poor up through the lifestyle ladder. For good measure, the freebie economy is advantageous to ‘Bharat’ as well, for the increase in consumption among the masses would help expand margins due cost economies of scale. The ‘freebie policy’ is a rational one to adopt when technological advances turn scarcity to abundance (such as resource discoveries) without a concomitant increase in demand, or when technological advances increase the rate of obsolescence in the market. The strategy serves implicitly as a labor supply control instrument too. If blue collar wages rise unsustainably, as they do during economic booms, the freebie cut-off percentile falls, forcing those marginal households to compensate for the loss in freebies by supplying labor, thus forcing blue collar wages back down. Such strategy is particularly opportune when unemployment rises, or when wage pressures threaten to stymie economic growth. And, despite the strategic plays around solid waste, the freebie strategy serves as a conservation policy too. By offering a limited amount free, the strategy induces households to constrain their consumption to the rationed freebie. Such strategy is applicable to environmentally injurious, albeit essential consumables. In an economic downturn, the strategy keeps the industrial engine going by offering ‘luxury’ durables to households just below the percentile cut-off. The opportunity cost of freebidizing such households is mitigated, on one hand, by interest rates that are at the bottom of the economic rate cycle, and on the other by lower inventory costs (and by the fall in the price of durables with the fall in consumer demand during recessions). Implementing the ‘closed’ freebidy scheme smoothens out the demand for durables and in turn the inventory of consumer durables. The built-in incentives and dis-incentives in this proposal drive the economy to find a sweet spot that is a pareto compromise between, on one hand, equity and efficiency, and on the other between efficiency and the environment. It even obtains an implicit and endogenous rate of societal technological advance, as well as product-specific innovation and obsolescence rates. Over time, the society moves incrementally toward an environmentally, financially and even a technologically sustainable welfare state.

Now, for that word in the dictionary…

Dial M for Miracle, Right?

TAKE OR PAYAYA! – A ‘SWOOF’ ON ELECTION CAMPAIGN FINANCING

TAKE OR PAYAYA! – A ‘SWOOF’ ON ELECTION CAMPAIGN FINANCING

Ganga Prasad G. Rao

Election campaign financing and reform has been at the forefront of politics for the undue influence it has on everything from candidate choice, the platform, the choice of constituencies, the party manifesto itself, even post-election strategies and policies of parties, whether winners or otherwise. The lack of a credible, public, legal, and ethical system to raise finances for election campaigns (and for other normal political activities) has induced many an ill in our society – from corruption and fraud to conspiracies, murders and allegation of electoral manipulation with ‘foreign’ money.

One of the primary inadequacies with the existing system which raises funds from special interests is the overt expectation, post-elections, of returns, even immediate and substantial, for political contributions made prior to elections. Such expectations, admittedly difficult to deny post the electoral win, have resulted in many an administrative lapse/oversight, mis-guided policies, regulatory loopholes and legal grey zones. The harm to the economy, in terms of efficiency losses, and the exacerbation of social inequity could lead to unforeseen, yet large and irreversible consequences in years and terms in to the future. This realization has spawned many an effort to correct the problem, most of them revolving around raising Election campaign funds, ECFs, publicly. Solutions – ranging from involuntary wage deductions, voluntary contributions with tax returns, or a (sales) tax-surcharge – have been mooted, but did not find favour for reasons of impracticability, or worse, a ‘who will bell the cat’ syndrome. Elsewhere, there is the matter of the Government timing its policies to produce results toward the end of its term, so it could leverage its incumbency advantage to pull away in the race for financial contributions and, indeed, with the elections itself. For these and other reasons, it is necessary to consider alternate means of financing elections and ‘satisficing’ coalition partners and the opposition during the term of the ruling party.

Let us therefore take a tentative step forward and consider an admittedly unconventional strategy for financing elections, a strategy that fills the Election pot with ‘contributions’, Hallelujah!, from friendly and unfriendly nations across and beyond our borders. But why? And how? The ‘why’, as it turns out, is easier than the ‘how’. Elections decide the future direction of the nation for the immediate term, and even for terms to follow. And wouldn’t friendly and unfriendly nations - trading partners and competitors – seek to influence that direction much as our MEA seeks to extend its ‘panchsheel-moderated’ influence to SAARC, ASEAN and nations beyond? And if the future of one nation were inextricably intertwined with the futures of friendly and competing nations, wouldn’t it make sense to design a system that permitted each nation to pursue its foreign policies through an overt, legal monetary route – even one that influenced policy though electoral choices - than through underground channels that brought diplomatic disrepute?

As for the ‘how’, if there is mutual awareness, if not tacit recognition of each other’s ‘extra jurisdictional’ monetary influences, then the same could instead be routed through the Sovereign Wealth Fund, SWF, route. Every nation has a Sovereign fund, a fund ostensibly meant to protect the nation’s wealth in the present and the (long) future. Thankfully, these Sovereign funds operate within and without the confines of one’s own nation, and against one another, bilaterally and multi-laterally. What if we exploited their geographical spread across nations to create as many election pots as SWFs, and framed rules under a ‘Hedge (Opposite) ZS’ paradigm to fill them? A Sovereign fund, due its decades-, even century-long vision, seeks more than merely a monetary return; it seeks investments that turn its nation financially, economically, socially, and environmentally sustainable over that duration. That ‘sustainable threshold return’, determined by wealth, resource endowments, and technology, will likely approximate the ‘very long-run’ real interest rate (one can’t do any better with a ‘VLCC’ fund seeking to avoid turbulence in that many dimensions) over the ‘floor’, the floor being the ‘natural rate of gold price inflation’ (one can always postpone a future for a lowly return that approximately matches gold inflation). Aware of this band of low returns, the upper boundary of which varies across nations, the SWFs consciously exploits short- and intermediate-run ‘market exuberance’ to sweep away gains which have their origins in excess volatility, excess returns, or a ‘bakey’ on Potential GDP (the Potential GDP ‘Gap’). These gains find their way in to various pots – overt Foreign aid and a Strategy fund for extra-jurisdictional legislative initiatives if a friendly nation, and a 2-pronged ‘Slush funds for covert military assistance plus a Peace dividend to incentivize economic and military cooperation’, if an unfriendly nation. Since politics determines who takes over the reins of the government, the SWF finds it appropriate that the Peace dividend be offered toward election campaign funds, so the winner, regardless of which party, would be receptive to a peaceful, co-operative future upon forming the new government.

Nations might differ in the ‘threshold returns’ they set for their SWF given their resource endowments, stage of development and expectations for the future. In turn, this translates to varying degrees of involvement in the capital markets of other nations and implies different behaviour in the markets, and indeed contributions to the ‘Peace Dividend ECF’. A rich nation that seeks to be just and sustainable might adopt a lower threshold return than a developing nation and distribute more of its gains among ECFs than the latter. Consequently, the rich nation may offer a larger contribution to the ECF than would a developing nation.

If level changes in the Equity section of the market are indicative of achieving performance benchmarks or falling short of them, Equity and Bond volatility of lessons or interim compensation/exploitation, changes in Bond levels of ‘secular’ reductions/increases in inequity, and Complements of the presence of ‘opposites and hedges’, then, given nations could be friendly or competitors, and the ‘home’ government either to the Right, Center, or Left, there are, potentially, several alternative configurations for the allocation of SWF funds in Boom and Bust years across asset classes. However, using the ‘principles’ as enunciated above, two illustrative, albeit aggregate allocations for a pair of SWFs is proposed below:

FRIENDLY NATIONS

NATION B CAPITAL MARKET		Source of Return	NATION A CAPITAL MARKET
Bond	Equity		Equity	Bond
	SovA Comp (20%)	Volatility	SovB Comp (10%)
SovA Comp (20%)	SovB Key (65%)	Level	SovA Key (50%)	SovB Comp (20%)

Nation_A Peace Dividend: Sov_B Bakey(5%)

Nation_B Peace Dividend: Sov_A Bakey (10%)

UNFRIENDLY NATIONS

NATION B CAPITAL MARKET		Source of Return	NATION A CAPITAL MARKET
Bond	Equity		Equity	Bond
SovA Comp (10%)	SovA Comp (5%)	Volatility	SovB Comp (10%)	SovB Comp (10%)
	SovB Key (50%)	Level	SovA Key (60%)

Nation_A Peace Dividend: Sov_B Bakey (30%)

Nation_B Peace Dividend: Sov_A Bakey (25%)

Thus structured, the Peace Dividend pot is the sum of gains from capital markets and strategic residual nations pay each other to avoid overt military, economic, or diplomatic confrontation in the current time frame. The pot could also be alternatively interpreted as representing the monetary translation of resolved and unresolved issues in international trade, diplomatic/military relationships and social/religious contracts/benchmarks, or as representing certain viewpoints and (unilateral) decisions by the SWFs. By the nature of the allocations, the ECFs shrinks when SWFs prefer to stay invested in peace time, and enlarges in those years when the two nations turn unfriendly and lock horns with each other. By offering the Peace Dividend toward the Election Campaign fund, the nations mean as much to share the ‘spoils’ with political parties, as it means to hold them responsible for correcting the unresolved issues in the new Parliament.

In a multi-lateral context, each nation would be investing across the capital markets of friendly and unfriendly nations, and the SWF allocations turn as much more complex. It is suffice to point out, however, that in such cases, the SWF would invest much less at home and distribute a larger share of its portfolio in investments abroad. Further, the allocation to any single market would be a small fraction of its market capitalization and, indeed, of the SWF net assets. Consequently, the ECF, now comprised of contributions from several SWFs, would take on an international flavour and seem like an International Election Fund. Extrapolated to all democratic nations, the ECFs would constitute a global system for cross-financing of elections.

The focus now shifts to how the monies available under the Election Fund are apportioned across the various parties – ruling and opposition. To aid in answering the question, consider a proposal that rewards and punishes the Ruling party and the Opposition in some relation to their economic and social performance. In a democracy, parties make ‘offers’ to voters via their manifesto/agenda and nominate candidates to pursue them. Due the majority criterion, populist policies – policies that are privately enriching to the masses in the immediate- or short-run, but zero-sums across time, space, and the environmental commons, are preferred by voters. Due competition, parties seek to better one another with their offers, and thus push the more greedy or desperate amongst themselves to stake a manifesto that implies extreme, unsustainable exploitation of the commons and future generations. Such economic exploitation is facilitated by interventions in various economic spheres, specifically, interest rates, subsidy-induced government borrowing and budget deficits, exchange rate and trade policy, and industrial policy. A Government that follows a zero-sum strategy, ‘depreciate ‘n export’, or ‘exploit the environment’ strategy is likely to:

a) lower short-term interest rates,

b) lower Corporate/Capital gains/Personal Income taxes,

c) announce populist subsidies that enlarge the budget deficit and induce an unsustainable fiscal deficit,

d) resort to laxity in enforcing environmental laws and regulations, and

e) artificially depreciate currency to boosts exports if at the cost of stoking domestic inflation.

Such interventions lead further to structural imbalances in bond and savings markets, currency markets, international trade and environmental protection. An ECF that distributes the Peace Dividend monies indiscriminately among political parties could exacerbate these tendencies, and cause irreparable damage to the economic and financial fundamentals of the nation. To staunch such irreparable economic damage, the ECF must so structure its ‘payouts’ that it incentivizes prudent and sustainable economic policy decisions by the political parties.

Toward constructing a ‘rule of thumb’ for ECF payouts across parties, first conceptualize a Payout Fraction, PF, designed simply as a counter-weight to the perverse incentives faced by political parties, in particular, the Ruling party, even if it implies, in the context of politics spanning the entire 180 degree Left-Right spectrum and the presence of friendly/unfriendly nations, a certain subjective judgement as to what is ‘appropriate policy’ and what isn’t. Let PF be a product of two variables: a time-dependent ‘Equity Rating’, Z, and a composite of policy variables and economic parameters, EPP, that measures the ‘ZS-Exploit’ strategy:

PF = k. Z.EPP

Z, the first component of the PF, constructed as A(t/60) and A(1- t/60) - where 't' represents the month count from the start of the new government for a 5 year term - provides for formal cognizance of the public perception of the government - the so called Approval Rating, A - in the distribution of electoral funds between the ruling party and the opposition parties. If the survey for the Approval rate were so designed as to limit itself to household and social welfare (an indicator of cost of living, livelihood standards, and social equity), then the above formula would be a time-weighted, see-saw combination of equity and efficiency measures. It’d apply directly to the Ruling party, but in the complement to the Opposition. In both cases, the fraction would vary over time albeit in opposing trends. The ruling party stands to gain much of initial fund flows from the ECF; conversely, the hand of the Opposition is strengthened toward the end of the term, thus offering a credible counter-weight to the incumbency advantage of the existing government.

The second component, EPP, must be designed to offer an appropriate corrective signal that, when applied to distribute monies from the ECF, would offer the appropriate disincentives to political parties and force them to refrain from engaging in short-term exploitive behaviour. That signal would only obtain if EPP targeted those instruments and policy variables that the Ruling party employed to exploit, intervene in, or influence outcomes. It is to the choice (and design) of these instruments, outcomes and policy variables that we now turn our attention to.

Many governments have exploited the trade-off between economic growth and the environment to jumpstart their economy. To counter this incentive, albeit ‘judiciously’, we include as the first term of the PF equation, the percent GDP growth net of the Inflation in the price of Carbon Permits; the inflation in the price of carbon permits being an indicator of the marginal severity of environmental exploitation. If the Government were environmentally judicious with its growth policies, the net would be positive, implying its environmental compromises resulted in higher economic growth. Conversely, poorly conceived, environmentally profligate industrial policies that raise marginal environmental damage and turn the net negative, take away from the Payout fraction to the Ruling party. Anticipating that the ECF will deny them campaign funds for being environmentally insensitive, the Ruling party either changes course or delays the environmentally injurious decision, thus averting the environmental wrong.

To the second term in the PF formula, we assign the task of catching the Government short if it pursues the all-too-familiar Keynesian ‘spend-big-on-subsidies-and-kickstart-the-economy-with-low-interest-rates’ strategy. Such strategy discounts the impact on government finances, in particular the budget deficit, and in turn leads to both inflation and higher long bond yields due inter-temporal and cross-sectional ‘crowding out effect’. To counter such ‘governance short-cuts’, the Payout Fraction is designed inversely related to the sum of the long-short rate spread and the inflation rate. This variable increases in magnitude with the extent of intervention and damage, and helps check any ‘irrational exuberance’ on the part of the Ruling party upon assumption of office.

The third strategy, that of ‘Depreciate ‘n Export’, involves intervening in the currency-exchange rate market to artificially depreciate the currency as a means to turn exports attractive. Such depreciation could be induced by a variety of tactics: from flooding the economy with excess supply of currency (M2), sustained selling of domestic currency to buy dollars in the currency market, to reducing the CRR. The ensuing boost to exports (which supposedly contributes to GDP growth) is tempered by the hike in inflation and the compensating rise in bond yields. Thankfully, the Payout Fraction has anticipated the flagrant exploitation of such a strategy in the bond-inflation summation construct, and the same is sufficient to internalize this perversity too.

Much like the Budget deficit is exacerbated by populist subsidies, the Current account deficit too is a reflection of exchange rate and terms of trade and, thus, is affected by trade policies. The Current account deficit is determined by the efficacy and the sustainability of exchange rate interventions. A Government that maliciously adopts a deficit-raising growth strategy must be held accountable to its voters. The ECF-PF route is a tentative means to obtain such control. A ratio of GDP growth to the sum of Budget deficit and Current account deficit reveals the effectiveness of both the subsidy economy and trade policy; it is a direct variable in the Payout formula. This ratio assumes values greater than 1 when the percent rise in the sum of deficits is outdistanced by the percent rise in GDP, and less than 1 vice versa.

Finally, the tendency to either reduce Corporate/Capital gains tax rate or personal income tax rates to assuage the business community or middle class voters can be anticipated with a construct that is simply the ratio of the sum of marginal Corporate, Capital and Persona Income tax rates to the yield on Long bonds. The rationale is that a reduction in tax revenues must be compensated for with the issue of more long bonds (short bonds would come to roost within one’s own term); in turn, raising long bonds incrementally causes its yield to increase. This construct trends in opposite direction to the short-run incentives of the Ruling party and serves to brake those unsustainable ambitions.

Combining the above ‘arguments’ of the EPP function, the Payout Fraction takes the form:

PF = k. Z. EPP{ [ (y_bl-y_bs)+i_p] , [GDP^/(d_b+d_ca)^], [GDP^- P_cp^] , [(t_c+t_cg+t_pi)/y_bl] }

where

^: percent growth rate of the relevant variable

Z = A(t/60) - Opposition; A(1-t/60) - Ruling party

i_p: (Price) Inflation

y_bl: Long Bond Yield

y_bs: Short Bond Yield

d_b: Budget Deficit

d_ca: Current Account Deficit

t_c: Corporate Tax

t_cg: Capital Gains Tax

t_pi: Personal Income Tax

P_cp: Price of Carbon Permit

Together, these variables measure the net impact of biased, politically motivated, or economically indefensible interventions in domestic, trade, taxation, currency, and goods markets. The Payout Fraction, tentatively proposed above, when computed and combined with the aggregate ECF pot for the nation (as determined by contributions from various SWFs operating in the nation’s capital markets) determines the flow of election funds to the Ruling and opposition parties. Thus designed, the Payout Fraction offers the right incentives to political parties no matter on which side of the government they sit on. It achieves the goal of ‘equitably’ distributing the ‘Bakey-Largesse-Sting’ from the SWFs among political parties who determine the economic course of the nation.

The upfront knowledge of the Payout Function, and the fact that any lapse in policy making enriches the opponent, ensures political parties anticipate their gains and losses under alternative strategies, re-consider incentives before and after the elections, and internalize the same in their policy promulgations. Finally, the advantage that the Ruling party has in terms of determining the size of its own Payoff (and that too, immediately) due promulgating policy at the start of the term is counter-balanced by the design of the Payoff function which enriches the Opposition toward the end of the term when SWFs are likely particularly active and when public opinion turns absolutely critical to survival.

The proposal above is, in the context of the globalized society we live in and the realities of the day, a practical solution to the issue of Electoral and Party financing. It obtains a degree of control on the perverse incentives facing political parties in elections by offering them a publicly credible and legal source of funds for campaigning, and guides the nation toward an equitable and an efficient economy by inducing prudent and enlightened policy making.

Besides, it leaves something citizens relish on their dinner plates…

…. A Corruption Bakey!